What is credit policy ?

Credit is temporary capital and the objective of credit is to lend with the purpose of
increasing profits and sales.

A sound credit policy in business is the blue print to managing by measurement and
benchmark

The question then arises is 'What is a Credit Policy and how does one write a Credit Policy for
their specific nature of business operations?

Writing an effective Credit Policy begins with an understanding of the financial exposure
that you or your business can endure and the amount of your working capital that you would
be willing to risk, or call it 'invest' in your customers.

1. With the information-age revolution, knowledge-based activities are becoming increasingly
important for existence.

2. Hence, enhancing skill-sets and knowledge is an intangible component of a credit policy.

3. I am of the firm belief that 'what gets measured gets managed'. Therefore as a matter of
policy one should manage by measuring results.

4. As a guideline you can write your policy in the following sections.

The contents of each section can be written to best fit the nature of your franchise:
1. The set-up of credit function.
2. Objectives of the credit function
.3. Obtaining Information on new customers.
4. Process of assessing the information to arrive at line of credit and credit terms that will be
offered.
5. Monitoring your investment in your customers
6. Defining past-due and bad debts
.7. Targets, benchmarks and deadlines for the credit function
.8. Analyzing the changing needs of your markets/customers.

5. Credit Management is an art and not a science. It is definitely an 'indefinite'.

6. But as a credit adage goes "get the calculations right in a calculated risk" and remember that
'A sale is not complete till the money is collected.

Credit policy Indecent exposure
1. People taking loans on high rates of interest and proving to be deliquescent
customers.
2. As happened during Russia’s financial crisis of August 1998.,, if the banks
continue giving money to deliquescent customers in India then the financial
pillar may collapse.

3. Banks should take heed of the credit history and should provide the loan
accordingly.

4. The essential output from the credit approval process is the setting of the
bank’s credit limits

5. Some recent discussions have concluded that credit limits are insufficiently
flexible and limit the scope of a bank’s traders, and that they should be
replaced by sophisticated return on risk measures.

Using this approach, traders are allowed to deal up to any level, provided they
generate an adequate return to compensate for the risk taken.

The greater the value of the trades, the higher the return demanded. But this can
give rise to extra dangers by encouraging excessive leverage, and is too reliant
on the use of value-at-risk measures

. Limits are still needed to protect against event risk.

6. To monitor their banking and trading activity in a controlled fashion and on a
global basis, banks must set multiple limits – by product, operational unit and
customer subsidiary – for every customer or customer group.

7. Banks must define the approaches to be used for calculating exposures
against limits as part of their credit policy

8. The decision to extend credit to any client or company depends on five “C”s.
they are character , collateral, capacity, capital, conditions.

9. Trade credit typically increases the sales by 30 %

10.If used in right manner trade and consumer credit gives immense growth to all
the sectors.

2. Key reference rates were reduced by one percentage point each, sending a strong
signal that commercial banks should lower interest rates for commercial borrowers.
Banks responded by reducing prime lending rates to 13 percent. The Cash Reserve
Ratio requirement was left unchanged at 10 percent.

3. Under the new credit policy, FIIs were allowed to invest up to 30 percent of their
assets in treasury bills, and banks were given freedom to fix penalties on premature
withdrawal of deposits. In January 1998, the rupee hit a low of Rs 40.45/ dollar, due
in large part to concerns about the Asian currency crisis

.
4. The RBI adopted a number of measures that stopped the rupee's slide and actually
led to some appreciation.
5. The interest rate on short-term domestic deposits was also deregulated and banks
were allowed to set different prime lending rates.